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Corporate taxes and the location of FDI in Europe using firm-level data

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  • Tomas Silva

    ()
    (Office for Strategy and Studies, Portuguese Ministry of Economy)

  • Sergio Lagoa

    ()
    (Department of Political Economy, ISCTE - University Institute of Lisbon)

Abstract

European countries are facing an ever-increasing competition for Foreign Direct Investment (FDI). This paper studies how corporate taxes affect the location of FDI in Europe. Firm-level data is used to estimate a conditional logit model. We start by analysing the impact of the level and volatility of three different tax rates on FDI. Next, we analyse how economic and monetary integration influences the effect of taxes on FDI. The interaction between taxes and the upward and downward cycles of FDI is also analysed. Finally, we focus on how the impact of taxes depends on project characteristics. We conclude that taxes play a significant role in attracting FDI, but the issues analysed imply that there are some nuances in this relation, many of them relevant for policy makers.

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File URL: http://www.gee.min-economia.pt/RePEc/WorkingPapers/GEE_PAPERS_44.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação in its series GEE Papers with number 0044.

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Length: 28 pages
Date of creation: Dec 2011
Date of revision: Dec 2011
Handle: RePEc:mde:wpaper:0044

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Keywords: FDI; Location; Taxes; Conditional Logit Model;

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  1. Harry Huizinga & Luc Laeven, 2006. "International profit shifting within multinationals: a multi-country perspective," European Economy - Economic Papers 260, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  2. Fritz Breuss, 2001. "Macroeconomic Effects of EU Enlargement on Old and New Members," WIFO Monatsberichte (monthly reports), WIFO, vol. 74(11), pages 655-666, November.
  3. Kelly Edmiston & Shannon Mudd & Neven Valev, 2003. "Tax Structures and FDI: The Deterrent Effects of Complexity and Uncertainty," Fiscal Studies, Institute for Fiscal Studies, vol. 24(3), pages 341-359, September.
  4. Haufler, A. & Schjelderup, G., 1999. "Corporate Tax Systems and Cross Country Profit Shifting," Papers 1/99, Norwegian School of Economics and Business Administration-.
  5. Young, Kan H., 1988. "The Effects of Taxes and Rates of Return on Foreign Direct Investment in the United States," National Tax Journal, National Tax Association, vol. 41(1), pages 109-21, March.
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